The Latest Trends in Mortgage Insurance, and How They Impact You

Of all the companies that suffered during the housing crisis and Great Recession, mortgage insurers fared among the worst. Many fell by the wayside as the financial crisis bit hard, and losses piled up.

But now the housing market is back, and the survivors are building profitable books of business in this $1 billion-per-year industry. So what precisely is mortgage insurance, and how can recent industry trends impact you?

Let’s start with the basics. If you bought a home with a mortgage, your monthly payment likely has at least two components. The first one is the principal and interest paid to the lender. The second is the monthly amount paid into escrow to cover your annual homeowner’s insurance premium and real estate taxes.

But if you weren’t able to make a down payment of at least 20%, you probably have a third component in your payment. That’s mortgage insurance.

Mortgage insurance is designed to help potential homebuyers qualify for mortgages more easily, and to protect lenders in case borrowers default on their loans. It basically fills in the gap between the cash that you have, and the amount the bank wants in order to approve the loan. Without mortgage insurance, many home buyers wouldn’t be able to buy homes at all.

Be aware this is not insurance for you, although you pay for it. It is insurance for your lender — who wants to make sure that it is not exposed to unreasonable risk.

The amount of your monthly mortgage insurance premium depends on a number of factors. But typically, the less money you put down and the greater your credit risk profile, the bigger that third component of your payment will be.

Borrowers can cancel mortgage insurance once they have 20% equity in their homes. If they don’t, mortgage servicers are required to eliminate it once the loan amount reaches 78% of the original value of the underlying property (as long as the borrower is current on his or her payments).

One last thing: Mortgage insurance generally applies to conventional mortgages. FHA and VA loans are guaranteed by the federal government under a different system, and don’t require private mortgage insurance.

Now that we know a little bit more about mortgage insurance, let’s take a look at the major companies in the business. Five players dominated the industry in Q1 2017, with 82.4% of the overall market and direct premiums totaling $975.3 million.

Top 5 Mortgage Insurance Providers in Q1 2017

Mortgage Guaranty held the top spot, with $261.6 million in direct premiums and a market share of 22.1%. Radian Guaranty Inc. was in second place, with $239 million in premiums and a 20.2% share.

Although it’s only the fifth-largest player, Essent Guaranty Inc. also sports the best safety rating of “A-”, and the largest year-over-year business growth. It added 15.5% more mortgage insurance policies since Q1 2016, growth that far outpaced its competitors. In fact, United Guaranty Residential Ins. Co. and Genworth Mortgage Ins Corp. shrunk their business by 13.8% and 1%, respectively.

One development that bears watching: The potential for “deeper coverage.” Specifically, mortgage insurers have been discussing with the Federal Housing Finance Agency (FHFA) and the Government Sponsored Enterprises (GSEs) whether mortgage insurance should be required on loans with even lower loan-to-value ratios.

Or in other words, you wouldn’t just need to get mortgage insurance if you put less than 20% down. You’d need it if you put less than, say, 22% or 25% down. Insurers believe that would allow for additional market penetration and reduce the risk of taxpayers picking up the tab in case of another housing market or economic downturn. But it remains to be seen whether their lobbying efforts will gain traction.

In the meantime, the best advice is simple: If you can come up with at least 20% down for a home, do so. That will eliminate that third component – the mortgage insurance one – from your monthly payment. And if you have to use mortgage insurance, don’t forget to ask your lender to remove it once you’ve paid your balance down to the 80% loan-to-value threshold.

Think Safety,

Gavin Magor

Insurance Insights Edition, By Gavin Magor, Senior Financial Analyst Gavin has more than 30 years of international experience in credit-risk management, commercial lending and insurance, banking and stock analysis and holds an MBA. Gavin oversees the Weiss ratings process, developing the methodology for Weiss’ Sovereign Debt and Global Bank Ratings. Gavin has appeared on both radio and television, including ABC and NBC as an expert in insurance, bank and stock ratings and has been quoted by CNBC, The New York Times, Los Angeles Times, and Reuters as well as several regional newspapers and trade media.